Wakanyugi wrote:obiero wrote:quicksand wrote:Magunia wrote:Allow me to chime in
According to an article by Duncan Miriri "there were less than 25,000 mortgages in Kenya and mortgage debt made up just 3.15 percent of the GDP in 2015."
Those saying that there will be a real estate bubble burst are mistaken.
In Kenya the banks protect themselves very well. The only way rent prices will go down is by oversupply of homes by the government. That is not going to happen because of the ppp thing
http://www.reuters.com/a...worldbank-idUSL9N13C01R
I am convinced there is creative accounting and mis-reporting going on at banks. Some of them should be quite distressed. There must be a lot of capital tied up in half-finished projects or in projects completed but with no occupancy or buyers, which means the owners are not servicing loans. These loans should be in bad debt / write-down territory now, fire sale mode. But no, everyone remains stiff lipped, probably hoping things will turn around, the turds in the books remain hidden somehow cause the fundamentals don't appear badly off, it is all hunky-dory.
What if there is no turn-around in the next 5 to 10 years? How bad are the books I wonder? Will it be another Nakumatt-like scenario, a shiny edifice that is hollow inside?
Our economy fell seriously ill exactly 4 years ago..
This bubble has been bursting since 2010?
It doesn't burst, but there is no correction either. How? It is mind-boggling.
The values booked are not the same as real value. It is artificial.
We have loans underwriting overvalued assets. For instance, if you develop a house using 10 million
(land+construction costs),..then you slap a 20 million price tag, doesn't mean someone will pay you that 20 million, probably not even the 10 million you used ..
if you consider an extreme case (suppose you built on a site based on future plans that a tarmacked road will be constructed just 200 meters upstream ..then the government changed its mind and moved the road 15kms away
)
may be the best you can get is 7m for the house. Now if it was financed, may be the bank books it as a 10 million with projected interest earning less administration costs at a minimum; if there is a default perhaps it books
it as a reclaimed asset of 20 million or close- as deluded as the original owner. It is a simplistic model but I think it is an apt representation of how to build a house of cards.
This is where CBK is failing us.
CBK does not stress test Kenyan banks, doesn't audit the asset side of the balance sheet to get true valuations. Banks are getting away with putting whimsical figures
here without challenge, "restructuring" loans time and time again -it is time CBK stepped in, did a few audits and told the banks 'hey, these billions you have declared here are nonsense, this is not the true value'.
If banks contest then a simple blind market test can be executed - economics by blunt instrument ala rate cap
.
Loans should have minimum thresholds -after which they become bad debts, period! ...Wake up one fine morning and tell Bank X to deposit 8.7 billion with CBK within 24 hours for a 2-week (adjustable) safe keeping.
Common sense measures like this and the true picture of P/Ls across Kenya starts to show. Just write a law that states if an institution (especially a listed one) is suspected (after a preliminary audit, obviously
) of misreporting,
overstating assets and understating debts, it will invite a comprehensive, independent audit at the institution's cost,..and then for CBK to develop a healthy skepticism and rabid suspicion of banks...they would straighten out immediately.
No one would hang on to overpriced, toxic assets and real estate would start to correct somehow ...
Just thinking out loud.
I hate banks.